Farrell: New thinking on when to file for Social Security

Social Security is the foundation of America's retirement system. One of the most important financial decisions about the elder years is when to file for Social Security benefits. Seniors receive a stream of inflation-adjusted monthly retirement income they can't outlive. The earliest you can file is age 62.

File early was the main personal finance message in the 1990s and early 2000s. The widespread assumption was that the 401(k) generation and professional advisers could do much better in the markets. The monthly benefit wasn't that big, the thinking went, so go ahead and file early. Industry practitioners didn't spend too much time learning the nuances of Social Security and Medicare. The focus was on stocks for the long haul and savvy asset allocation.

But the framing of the Social Security decision has changed dramatically, and for the better. The cornerstone achievement of the New Deal has gained newfound respect. For one thing, with average life expectancy on the rise, the value of a risk-free, inflation-adjusted monthly income you can't outlive is an invaluable insurance policy. For another, the retirement savings portfolio impact from two bear markets and two recessions in less than a decade was a sobering reminder that there is no guarantee of a decent market return.

Perhaps most important, there is greater appreciation to the financial benefits from waiting. The full or normal retirement age is currently 66 for those born between 1943 and 1954. If you file at age 62 you'll get 75 percent of the age 66 benefit. Wait until age 70 and you'll receive 132 percent of the age 66 payout. The promise of a risk-free 8 percent annual hike in benefits from ages 66 to 70 is simply too attractive to pass up. Think you can match returns like that in the stock and bond markets? The impact of waiting is especially powerful among lower-wage employees. Workers with an average salary of $30,000 a year can nearly double their annual retirement income from Social Security by putting in an extra eight years, ages 62 to 70.

The personal finance business is embracing the idea that 70 is the age most people should consider filing for Social Security. People should file earlier only for health and other reasons. The current mantra is to continue working into the traditional retirement years, perhaps in part-time jobs, and delay taking Social Security.

Here's the thing: Social Security is immensely complicated. The program has been revised ever since it was signed into law in 1935. For example, married couples have an estimated 8,000 permutations for deciding when and how to file for their Social Security benefits, according to Christopher Jones, chief investment officer at Financial Engines, the online 401(k) adviser.

The U.S. retirement system is like a pyramid. The base is Social Security. Additional layers are homeownership, employer-sponsored retirement plans (private and government, defined benefit and defined contribution plans), IRAs, and other assets such as bank deposits and savings accounts. In an interview, Jones emphasized the importance of understanding how all these assets affect each other during retirement.

"Retirement savings, Social Security, part-time work and taxes — it's a "holistic decision," said Jones. "How do they interact?" The financial whole is greater than the sum of the retirement parts.

Chris Farrell is economics editor for "Marketplace Money." His e-mail is cfarrell@mpr.org.

Chris Farrell is economics editor for American Public Media's weekly "Marketplace Money" show and author of "The New Frugality." He answers reader questions on most Sundays. Send questions to cfarrell@mpr.org and put "Your Money" in the subject line.